Listen, if you’ve lost the plot line don’t worry because everyone else has too.
Just a month ago, everyone was thoroughly convinced that the disappointing average hourly earnings number that accompanied the January jobs print was all the “evidence” the “data dependent” Fed would need to take a March hike off the table.
Fast forward four weeks and the story has completely changed. There was Yellen’s hawkish Valentine’s Day testimony on Capitol Hill, then a blockbuster CPI print, then a string of hawkish Fed speakers, then Donald Trump’s best impression of the term “presidential”, then Dow 21,000, then hawkish Yellen again and finally, to top it all off, a yuuuge ADP beat.
So with financial conditions loose and the incoming data supportive, the committee is ready to go. More than a few commentators this week noted that it would take some kind of catastrophe to derail a March hike at this juncture.
Well I wouldn’t go so far as to call it a “catastrophe,” but the ill-timed plunge in crude to pre-OPEC-cut levels (or damn near) certainly throws a deflationary wrench into the plan and stocks’ newfound propensity to sell off with bonds doesn’t help. Oh, and widening HY spreads and suddenly weak emerging markets might raise an eyebrow or two as well.
I tried my best to recount all of this earlier today in “More Trouble.”
All of this makes Friday’s NFP number that much more interesting. Let’s assume it’s a big beat. Does that mean we get an even steeper selloff in Treasurys? If so, what does that mean for stocks which, at (almost) exactly 1:30 EST, sold off simultaneously with rates on Thursday?
Who knows, but below, find a useful preview of “the big one” from Goldman.
We estimate that nonfarm payroll employment increased 215k in February, after growth of 227k last month. Labor market indicators generally strengthened in February, with a drop in jobless claims to four-decade lows, an acceleration in ADP employment growth to its fastest pace in nearly three years, and improvement in the ISM services employment index to a 5-month high. We also believe unseasonably warm temperatures and minimal snowfall boosted job growth in weather-sensitive industries. On the negative side, we look for a 10-15k drag in the government sector from the federal hiring freeze implemented in late January (we forecast +225k for private payrolls). Additionally, we believe diminished labor market slack may exert upward pressure on wages and possibly some downward pressure on job growth in certain industries.
Factors arguing for a stronger report:
- Jobless claims. Initial claims for unemployment insurance benefits moved lower, averaging 244k during the five weeks between the January and February payroll survey periods. This represents the lowest level of claims on this basis since the 1970s. The impact of seasonal adjustment difficulties on the jobless claims data is most pronounced in January, and we believe the sustained improvement in jobless claims through February suggests genuine improvement in the underlying pace of layoffs, and in the labor market more broadly.
- ADP. The payroll processing firm ADP reported a 298k rise in private payroll employment in February, its fastest pace in nearly three years and well above expectations of +187k. In past research, we have found that large surprises in the ADP report tend to be predictive of the subsequent nonfarm payroll surprise. Additionally, we believe the 66k rise in ADP construction employment suggests scope for above-trend growth in weather-sensitive payrolls categories.
- Warm temperatures and minimal snowfall. February exhibited unseasonably warm weather and relatively limited snowfall, both of which are likely to boost payrolls in weather-sensitive industries. Our analysis of population-weighted weather station data from NOAA (National Oceanic and Atmospheric Administration) suggests that snowfall during the calendar month totaled 4.0 inches, the third lowest accumulation in a February since 2006. Snowfall was also unseasonably low during the payrolls survey week, and such a pattern is associated with strong growth in weather-sensitive industries, including construction, retail trade, and leisure and hospitality.
- Service sector surveys. Most employment components of service sector surveys either improved or remained at elevated levels in February, and all remained in expansionary territory. The ISM non-manufacturing employment component rose to a 5-month high (0.5pt to 55.2), the New York Fed index increased to a 18-month high (+1.8pt to +18.9, SA by GS), and the Dallas Fed employment component edged up (+1.1pt to +5.9). Meanwhile, the Philly Fed non-manufacturing employment index pulled back from a 1-year high (-7.1pt to +12.4) and the Richmond Fed employment index edged down (-1pt to +7), though both indices remained at encouraging levels. The key labor market subcomponent of the consumer confidence report also remained strong (-0.1pt to +5.9), less than a point below cycle highs. Service sector payroll employment increased 192k in January and has increased 165k on average over the last six months.
- Seasonals. Since 2010, February payroll growth has surprised positively relative to consensus in six of the seven instances, with an average surprise of +36k. This may suggest some additional upside risk to the extent the BLS seasonal factors have not fully evolved to reflect this tendency.
Arguing for a weaker report:
- Federal Hiring Freeze. The new administration’s hiring freeze for federal workers (excluding defense and public safety) went into effect on January 23rd, one week into the February payrolls survey period. Some departments may be able to circumvent the impact of the hiring freeze though reduced attrition or increased contracted hiring. However, news reports have indicated reduced government hiring in some subindustries/departments, such as shipbuilding and social assistance/child care. Accordingly, we expect the hiring freeze to weigh on government payrolls in tomorrow’s report, with an overall drag in categories affected of 10k-15k.
- Labor Supply Constraints. We view the labor market as close to full employment, and as slack diminishes further, this should exert upward pressure on wages and potentially downward pressure on job growth – particularly as the unemployment rate in a given industry or geography falls meaningfully below its structural rate. In the February NFIB small business survey, 32% of firms reported having job openings that were hard to fill, the highest percentage since 2001. Additionally, the Beige Book for the March FOMC meeting included anecdotal evidence of more widespread labor scarcity, as some districts reported labor shortages of skilled workers and of workers in the leisure and hospitality, construction, and manufacturing sectors. Over the past two years, this trend toward diminished slack has coincided with slowing payrolls growth, raising the possibility that labor supply issues may already be constraining job growth at the margin.
Oh, and for Thursday’s “full retard” moment, we go to Business Insider who has a f*cking real-time countdown widget…